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In the old days, before NASD Notice 05-50 was released on Aug. 8, 2005, things were radically different. Since then, the financial services world has changed dramatically. Compliance, once an issue mostly concerning only NASD registered representatives, is now of tantamount concern to the careers of anyone in the industry. The hoops that an agent or adviser must now jump through are, indeed, rings of fire. If you fail to follow the rules, you will be badly burned.
Cases in point -- the compliance focus is narrowing in on you.
o In a suit filed against two insurance agents domiciled in his state, the Massachusetts Attorney General is charging that the two provided unlicensed investment advice. The suit alleges that in assisting two elderly clients to reposition assets from mutual funds into fixed annuities, the advisers tacitly provided investment advice without being properly licensed to do so.
o In a separate but highly related matter, the SEC recently overturned the so-called "Merrill Rule." That rule allowed NASD registered reps to open wrap accounts and charge fees based on the value of assets in the account, as is done by Registered Investment Advisors (or Investment Advisory Reps under a corporate RIA). Although the rule change is being appealed, it has put at least a temporary stop to non-RIAs charging fees. Broker-dealers with "wrap account" programs are closing the doors on the establishment of all new accounts.
o And of course, there is NTM 05-50. In this notice, the NASD (now FINRA, the Financial Industry Regulatory Authority) strongly suggested broker-dealers supervise the sale of indexed annuities, because it considers these fixed insurance products securities. This put the kibosh on the sale of indexed annuities for the reps of many, if not most, broker-dealers. The broker-dealers decide which indexed annuities, if any, may be sold, and run the commissions through their securities payout grid -- capturing a portion of the revenue generated by the rep.
o Most recently, a Wall Street Journal article appearing on May 30, 2007, quoted Joseph Borg of the Alabama Securities Division -- he is the president of the North American Securities Administrators Association (NASAA) -- as saying that the pilot probes of "free dinner and lunch seminars" netted 26 positive actions against reps for providing unregistered investment advice or misleading information to consumers. Borg went on to say that the NASAA is expanding the pilot probe from the seven test states and hopes to have investigations under way in all 50 states soon.
In an address to the Society of Certified Senior Advisors in May 2007, Borg said that they consider indexed annuities to be securities, even though they are not currently classified as such by the SEC. The NASAA position is that since assets in indexed annuities may be lost through a surrender charge, they are securities. While Borg admitted that they do not have jurisdiction to regulate the products -- for now -- they do have jurisdiction over how they are marketed.
What does all this have to do with you?
Everything. These examples illustrate how a powerful beam of light is being focused on your practice. If you hold lunch or dinner seminars, you should start to assume that there is someone there from the state securities division listening and taking notes on everything you say. You should assume that someone from that division will set an appointment to come hear what you say during your appointment process.
If you say the word "investment" and are not a Registered Investment Advisor (or IAR), you've virtually cooked your own goose.
There is a simple solution, however, to this situation. Become a Registered Investment Advisor, and then use it in your practice.
The truth is, many insurance reps are holding themselves out as "financial advisors" or "financial consultants" while in reality they hold only a life or life and health insurance license. They then lead prospects to believe that they are providing unbiased advice, when in reality they move assets principally into fixed annuities or life insurance. This is neither balanced nor unbiased advice. And if that's what your practice looks like today, you need to wake up and smell the coffee!
Here's what you can do to protect yourself and your clients:
1. Obtain your Series 65 license.
2. Help your clients establish a balanced portfolio that incorporates the more traditional asset classes, such as equities and debt (stocks and bonds) side-by-side with conservative savings vehicles, such as fixed annuities.
3. Use risk tolerance questionnaires to help you determine the right asset allocation on a case-by-case basis. First, having these in your file will help protect you if a client becomes dissatisfied in the future, and second, it will give you a better understanding of how to assist clients with allocating their money.
Not sure how to do all this asset allocation? That's OK. There are many Registered Investment Advisory firms that can help you in developing suitable investment portfolios. These firms have years of experience and understand how to appropriately incorporate fixed and fixed indexed annuities alongside traditional asset classes.By following this path, you not only make certain that there is not a target painted on your back, but you do the right thing for your clients. As an added benefit, in most cases you can earn the right to manage all of the client's assets and not only a small portion that might be suitable for an annuity. And by building a portfolio of assets under management from which you earn an annual fee, you are building a recurring income stream. This income builds over time and means that on January 1 of each year, you are no longer "starting from zero." When you decide to retire, you'll have an asset with a known value that you can sell to help fund your own retirement.
The rings of fire are in front of you as we speak. You can ignore them and take your chances, or recognize the world as it is (as opposed to how you might like it to be) and take appropriate action.
Dean Zayed, JD, LLM, CFP, is the co-founder and CEO of Brookstone Capital Management LLC, a registered investment advisor that provides institutional-level money management to individuals and families across the U.S. Brookstone provides a turn-key asset management platform that investment advisors and financial professionals can use to deliver effective financial solutions to their clients.
